SEC, N.Y.’s Cuomo Hammer Out Deals in Pension Fund Pay-to-Play Cases

WASHINGTON — The Securities and Exchange Commission and the New York attorney general reached settlement agreements with investment adviser Quadrangle Group LLC and others for allegedly engaging in pay-to-play practices with state officials and their consultants to obtain investment business from New York’s pension fund.

The cases involving the New York State Common Retirement Fund, which was most recently valued at about $129 billion and is the third-largest pension fund in the U.S., are likely to be followed by other cases stemming from pay-to-play probes of pension funds across the county, according to sources. The SEC has several ongoing investigations, they said.

“This case has started a national investigation of public pension funds all across the nation,” New York Attorney General Andrew Cuomo told reporters in a teleconference call yesterday. “A significant amount of this country’s wealth are in these public pension funds and I fear, seeing what we’ve seen in New York, that it’s going to be a serious problem for the nation.”

In the settlement agreement with the SEC, Quadrangle Group, a New York City-based private investment management and advisory firm that specializes in investing in media and communications companies, and Quadrangle GP Investors II LP, a private-equity fund in which the Common Retirement Fund invested $100 million in 2005, would pay a $5 million civil penalty to settle securities fraud charges. The firms also would be permanently enjoined from engaging in such future conduct. But the agreement must first be approved by the U.S. District Court for the Southern District of New York in Manhattan.

The commission charged the firms entered into undisclosed quid pro quo arrangements with Henry Morris, the top political adviser and fundraiser for former New York Comptroller Alan Hevesi, and David Loglisci, the state’s former deputy comptroller, to secure the $100 million investment from the CRF.

The investment was secured after a Quadrangle executive arranged for an affiliate to distribute a DVD of a low-budget film that Loglisci and his brothers had produced and after the executive agreed to pay more than $1 million in “finder” fees to Morris, according to the SEC.

Under the Cuomo agreement, Quadrangle would pay $7 million, $5 million of which would be returned to the CRF and $2 million of which would go to the state Treasury. In other agreements, GKM Newport Generation Capital Services LLC, a Los Angeles-based private-equity firm, would pay the equivalent of $1.6 million; the political consulting firm Global Strategy Group and its chief executive officer Jon Silvan would pay $2 million; California lobbying firm Platinum Advisors would pay $500,000; and Kevin McCabe, an unlicensed placement agent, would pay $715,000.

Cuomo charged Quadrangle Group and GKM paid fees to Morris to arrange investments from the CRF.

The attorney general stressed that the settlement agreement with Quadrangle does not cover the firm’s former managing principal Steven Rattner, who until last summer was a key adviser to President Obama on the auto industry.

Cuomo released this statement from Quadrangle: “We wholly disavow the conduct engaged in by Steve Rattner, who hired the New York State comptroller’s political consultant, Hank Morris, to arrange an investment from the [CRF]. The conduct was inappropriate, wrong, and unethical.”

Cuomo said the actions against Global, Platinum, and McCabe stem from the use of unlicensed intermediaries or placement agents at New York public pension funds.

Global received a total of about $1.3 million for facilitating pension fund investments in private-equity funds managed by Intermedia Advisors LLC and Clayton, Dubilier & Rice, he said. McCabe partnered with Morris in a company, Purpose LLC, that facilitated an investment in the GKM fund from the CRF in 2004 and another allocation in 2006. His fees totaled about $477,000.

Platinum received about $337,000 in fees in connection with investments from both CRF and the New York City pension funds, Cuomo said.

The Cuomo and SEC investigations have led to current and proposed legislative and regulatory reforms.

Cuomo crafted a Public Pension Fund Reform Code of Conduct that bans the use of placement agents to solicit investments from public pension funds. It also prohibits firms from obtaining pension fund investments within two years after they make campaign contributions to the state comptroller or other election trustee of the fund. The attorney general has proposed a pension reform bill that would codify that code of conduct.

The SEC proposed anti-pay-to-play rules for investment advisers last August. The commission also is working with the Financial Industry Regulatory Authority on the regulation of placement agents.

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